Oct 17, 2012

FINANCIAL SECURITYBy LEE KEE CHUAN

THE money in
your EPF account is the money that will feed you and your family from the day
you retire until you pass on. It will be good if your children give you monthly
allowances when you retire, but it may be prudent to plan your own retirement
financial security.

Your EPF money, therefore, deserves your serious attention. There are unit
trust fund promoters who will approach you to draw it out to invest in their
EPF-approved unit trust funds.

The question is: Should you invest for potentially higher returns (by
exposing your EPF money to higher risks) or should you just be content with the
EPF dividend rate?

Firstly, let’s look at why EPF introduced such a scheme. According to the EPF
website, the “EPF Member’s Investment Withdrawal scheme allows you to withdraw
part of your savings in Account 1 for investments to increase your retirement
fund to support your life after retirement.”

This means that you are given the opportunity to make your EPF money work
harder for you.

The second reason is actually the most important. Inflation erodes your
purchasing power. Over the last five years, EPF has distributed an average of
5.4% dividend annually while the inflation rate averaged 2.7%.

Thus you should make the best use of the withdrawal scheme allowed by EPF to
ensure that you preserve the purchasing power of your EPF money in future.

Thirdly, you should let the power of compounding work for you.

Albert Einstein famously said: “Compound interest is the eighth wonder of the
world. He who understands it, earns it.”

Thus you should let some of your EPF money compound at a higher rate of
return.

Even a small positive difference in annual return can make a big difference
over time. To give you a better idea of the power of compounding, let’s use the
Rule of 72.

If your money earns 5% a year, it will double in 14.4 years. If it earns 7%
pa, it will double in 10.28 years. For 9% pa return, your money doubles in eight
years. If your return is 11% pa, it doubles in 6.55 years. If you earn 13% a
year, your money doubles in just 5.54 years. (To calculate the number of years
for your money to double, divide 72 by your rate of return.)

But before you start picking up your handphone to call your unit trust agent
or if any overzealous unit trust agent shows you this article to convince you
that you should invest with him or her, please finish reading the rest of this
article.

Let me give you a word of caution first. To invest your EPF money
successfully in unit trusts, you must follow the advice below as investing in
any unit trust fund carries investment risk, meaning the price of unit may go up
as well as down.

To help you decide whether using your EPF money to invest in unit trust is
for you, I bring up these two points to help you.

Firstly, by withdrawing your EPF money and investing in unit trust, it will
not earn you any EPF dividend. Add in the upfront sales charge by the fund house
of 3%. This is the opportunity cost that you need to consider.

Secondly, there is the investment risk of unit trust funds that you must
consider. There was a report in www.thestar.com.my way back in Aug 8,
2006 that reads: “The Government, alarmed over the more than half billion
ringgit losses reported from investments in unit trusts involving Employees
Provident Fund (EPF) contributors, has directed the EPF to impose stricter
conditions on such investments.”

The same report also mentioned: “A Malay daily reported over the weekend that
EPF contributors who invested an estimated RM600mil in unit trust schemes had
suffered losses.”

Having said that, it is still a good idea to invest your EPF money in unit
trust schemes to earn potentially higher returns. However, you must ensure the
following few points are adhered to when you invest.

You must have an investment method to start with. The dollar cost averaging
(DCA) is a good one to start but make sure you stick with it for years.

Those who withdraw a few times and then see if they make money will not
benefit from cost averaging.

There was a case of an investor who religiously withdrew his EPF money every
three months to invest in unit trusts in the last 11 years, starting in year
2000.

When he reviewed his investment in August this year due to the recent market
turmoil, he was glad that his unit trust investment using his EPF yielded 6.95%
compounded return.

This case shows that you must stick with a method that invests at regular
intervals consistently over a considerable period to be successful in making
your EPF money grow and increase your retirement fund.

This is because a regular investing method such as DCA can reduce the
investment risk by diversifying the timing risk of investing.

How about investing your EPF money using value averaging (VA) regular
investing method? If you have read my article two weeks ago in this column, you
will know why VA is the smarter version of DCA.

By using the reconstructed data from the same case I mentioned above, the
back testing done using value averaging on an EPF-approved Malaysian small cap
fund is really interesting.

The VA method yielded annual compounded return of 13.21% over the similar
period.

The result is consistent with the research done by Professor Paul Marshall,
who concludes that value averaging does show a performance advantage over
dollar-cost averaging, without incurring additional risk.

• Lee Khee Chuan is a Chartered Financial Consultant, Certified Financial
Planner and a Fellow of Life Management Institute, USA. He is a graduate in
political science, psychology and economics from National University of
Singapore. He can be contacted at 016-888 0138.

Oct 1, 2012

I often sit and wonder how life would be if and when I grow old. I just hope and pray I will never trouble my children or the people around me too much with too many demands and sorts. I do so hate having seen dramas in all forms and demands by parents towards children or sick people in the past and present. I have also encountered people who suffer an illness (even a mortal illness) in silence and never making a fuss or troubling their loved ones unneccessarily until the end. These are the people I truly respect and wish to emulate. Why would one want to put people surrounding them in a flurry or stressed out because of their incessant demands I have no idea, except for perhaps a selfish need to make people suffer along with them. Victims of such people would only barely tolerate them until such time tolerance turns to resentment and eventually hatred . I pray and I wish I will never do that to my love ones and family.....